REIT Equinix Receives Subpoena, Board Starts Investigation After Short Seller Report

Equinix is facing an inquiry from a federal prosecutor and has opened an internal investigation after a short seller last week accused the data center REIT of misleading investors. 

The firm disclosed Monday it had received a subpoena from the U.S. Attorney’s Office for the Northern District of California and said its board of directors' audit committee had begun an independent inquiry into the allegations.  

The investigations follow a report Hindenburg Research released Wednesday that alleged Equinix was using accounting tactics to inflate a key measure of profitability and accused the firm, the world’s largest data center REIT, of leasing more power to tenants than it is able to provide. 

“We take seriously our obligations of transparency and accuracy in our financial reporting,” Equinix said in a statement Monday. “We believe we have earned the trust of our investors — and all our stakeholders — by reliably delivering on our commitments with integrity and meeting the requirements of our customers.”

New York-based Hindenburg, which has taken a short position against Equinix, alleged the REIT misclassified maintenance expenses as “growth capex,” thereby underreporting how much it was spending to maintain its assets. 

The “accounting trick,” as Hidenburg described it, allowed the REIT to overstate its adjusted funds from operations by at least 22%, according to the report, which relied in part on interviews with former Equinix executives and employees. The mischaracterization of costs has helped boost AFFO by $3B since Equinix was converted to a REIT in 2015, the report says. 

Hindenburg also accused Equinix of oversubscribing its power capacity to tenants, creating a scenario where it would be unable to fulfill contracts if tenants attempted to use all of the power they are allotted. 

Power consumption has become a key variable for data centers as the rising popularity and adoption of artificial intelligence dramatically increases the amount of power used at the properties. 

Equinix has said the rapid rise of artificial intelligence would benefit the firm, but Hindenburg questioned not only the REIT's power capacity but also its ability to upgrade older facilities to meet today's demand. 

Equinix said in the statement that it doesn’t plan to comment further on the investigations “until appropriate to do so.” It described the subpoena as “not unusual in these circumstances” and said it intended to fully cooperate with the investigation.  

“We remain confident that our distinctive advantages create significant long-term opportunity for Equinix and continue to see our differentiated value proposition as highly relevant to our more than 10,000 customers,” the Equinix statement says. 

Equinix’s Nasdaq-traded stock is down around 7% since last week's publication of the report. The stock was down less than 1% in early trading Monday following the disclosure of the internal audit and Justice Department inquiries.

Hindenburg, led by activist investor Nathan Anderson, previously published a report that helped lead to the collapse of electric-car manufacturer Nikola. In January 2023, the firm published a negative report aimed at Indian conglomerate Adani Group that led to a $12B drop in the company’s market value, although its stock has since recovered. 

Its report on Equinix has faced some criticism, with brokerage TD Cowen describing it as “largely a re-hashing of a short thesis published in 2022” by short seller Jim Chanos against data center REIT Digital Realty.